Hedge Funds Raise Bull Oil Bets Most Since 2007: Energy Markets

Date: Monday, July 19, 2010
Author: Dan Stets, Bloomberg

Hedge funds and other large speculators raised bets that oil would gain by the most in more than three years just as it began to slide, the second straight week money managers lined up on the wrong side of the market.

So-called net long positions on the New York Mercantile Exchange rose 67 percent the week ended July 13, the most since February 2007, according to the weekly Commitments of Traders report from the Commodity Futures Trading Commission. Oil fell on four out of five days on the Nymex last week, ending down 0.1 percent at $76.01 a barrel as of July 16, and extended that decline today. It rose 5.4 percent the previous five days, the biggest weekly gain since May.

“Just like last week, when they were short when prices were up, now they were long when prices were down,” said Hamza Khan, an analyst with Schork Group Inc., a consulting company in Villanova, Pennsylvania.

Oil slipped last week amid evidence that the U.S. economic recovery is slowing, reducing fuel demand in the world’s biggest energy-consuming country. Hedge funds suffered their worst second quarter in a decade this year, losing 2.79 percent, according to Hedge Fund Research’s HFRX Global Hedge Fund Index.

Crude oil for August delivery dropped as much as 51 cents, or 0.7 percent, to $75.50 on the Nymex today. It was at $75.86 at 7:24 a.m. London time.

Net-long positions among hedge funds and other large speculators in crude oil futures and options combined on the Nymex rose to 84,455 for the seven days ended July 13, according to the CFTC data.

Slowing Economy

The Thomson Reuters/University of Michigan consumer sentiment index for July fell to 66.5 from 76 in June. The Federal Reserve Bank of New York reported July 15 that its general economic index dropped to 5.1 in July from 19.6 the prior month. The Federal Reserve Bank of Philadelphia’s general economic index declined to 5.1 this month, the lowest level since August 2009, from 8 in June.

Stocks dropped on the slump in consumer confidence and lower-than-estimated revenue at companies from Bank of America Corp. to General Electric Co. The Dow Jones Industrial Average declined 2.5 percent July 16 to 10,097.90. The Standard & Poor’s 500 Index slipped 2.9 percent to 1,064.88.

‘Low Base’

Speculators have pared bullish bets on oil by 56 percent since April, when crude traded at this year’s high of $86.84 a barrel on the Nymex. Net-long positions in futures and options combined fell to 50,503 in the week ended July 6, the lowest level in more than a year.

Last week’s “low base” exaggerated the significance of this week’s jump in bullish bets, said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

“Most of the money is really on the sidelines, we just don’t have big bets in these markets right now,” he said. Markets may “chop sideways, possibly for years,” he said.

Crude will have to break out of its range in order to entice managed money back into the market, said Khan at Schork Group. Oil has traded mostly in an $18 band since August, making it hard for speculators to turn a profit on crude, he said.

“We’ve been unable to break below $68 or above $86,” Khan said. “The buy-and-fly mentality just isn’t working in equities and it isn’t working in crude.”

The CFTC publishes aggregate numbers every Friday for long and short positions for speculators such as hedge funds and institutional investors, as well as commercial companies that buy or sell futures to protect against price moves.

--With assistance from Mark Shenk in New York and Barbara Powell in Dallas. Editors: Dan Stets, Justin Carrigan

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net